Palladium poised to become formidable threat to platinum

New York - Just as electric cars seem to be taking over, an element inextricably tied to the fortunes of the internal combustion engine is surging.

Palladium hit a 16-year high of $1 094.51 an ounce Tuesday and is 1.5% away from breaching its 2001 record of $1 110.50 an ounce, after doubling in price over the past two years. Having traded for a fifth of the cost of platinum as recently as 2009, palladium is now worth more than its sister metal's $943.65/oz.

To understand what's going on, it's worth looking to the long shadow cast by Volkswagen's diesel-testing scandal, and the growing toll of diesel emissions on European cities.

Palladium owes its place in the commodity pantheon to catalytic converters. In the 1960s, it was seen as an exotic but useless alternative to platinum, which occurs in the same handful of mines in South Africa, Russia and North America and was at the time principally used for showy jewellery such as Marilyn Monroe's wedding ring.

As catalytic converters were adopted from the 1970s to change harmful nitrogen oxides and hydrocarbons into less-polluting tailpipe emissions, the metals' talent for encouraging chemical reactions made them increasingly prized.

Significant differences remain, however.

Though its high price means it's usually grouped with platinum as a precious metal, palladium's scanty use by jewellers and investors means it resembles the likes of copper, nickel and zinc more closely than it does gold or silver.

About 81% of global palladium consumption in 2017 went into catalytic converters, with another 20% for similar use in industrial plants, according to data from Johnson Matthey, the world's largest refiner of such platinum-group metals. By contrast, investment and jewellery regularly constitute 40% or more of demand for platinum.

There's a more important distinction. Palladium is used for almost all petrol converters, but it doesn't work so well at removing diesel pollutants - so there platinum dominates. As a result, changes in people's driving habits can cause a ripple effect in metals prices.

Right now, diesel is going through a rough patch. With Parisians and Londoners choking on diesel particulates and automakers caught out faking emissions tests, sales of petrol cars in Europe overtook their diesel rivals last year for the first time since 2009. In France and Spain, where diesels made up more than 70% of the passenger-car market in 2011, the share is headed below 50%.

Glum market for platinum

The result has been a glum market for the companies digging into the deep and difficult seams of the South African bushveld to produce platinum. Combined operating income at the major producers, after briefly leaping into the black at the end of 2016, looks to be back in negative territory.  

Sibanye Gold, which has been acquiring discarded platinum assets for several years now, last month announced it would be adding Lonmin to its hoard in what looks like an attempt to prop up the sector through consolidation.

Joined at the hip by accidents of geology, platinum's pain has been palladium's gain. Miners have been loath to increase supply of platinum into a market where demand is falling, and as a result, output of palladium has been almost flat, despite rising consumption.

The last time platinum was cheaper than palladium in the late 1990s the situation quickly reversed, driven by Europe's diesel boom. Don't count on the same thing happening again.

Even if the dynamic between the two rebalances - for instance, through electric vehicles cutting into demand for palladium-petrol catalysts, or through carmakers mixing more platinum into their non-diesel converters - a formidable threat to platinum is on the horizon.

Recycling already adds some 2 million ounces a year to global platinum supply - not so much less than the 3 million ounces or so used in auto catalysts. It's about to become an even bigger business.

Diesel cars really hit their stride in Europe from the mid-1990s to the mid-2000s, driven by government incentives that treated them as a more environmentally friendly alternative. Those vehicles are now starting to come to the end of their useful lives, and will shortly see their converters turned into platinum scrap.

When that happens, expect platinum's weakness - and palladium's concomitant strength - to gain another lease of life.

This column does not necessarily reflect the opinion of Bloomberg and its owners.

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